Euro area exits record slump

By Angeline Benoit and Jeff Black, Bloomberg News

August 14, 2013

The euro area's economy emerged from a record long recession in the second quarter, led by Germany and France, amid the first sustained period of financial market calm since the start of the debt crisis.

Gross domestic product in the 17-nation euro area rose 0.3 percent in the April-June period after a 0.3 percent contraction in the previous three months, the European Union's statistics office in Luxembourg said today. That exceeded the median estimate of 0.2 percent growth in a Bloomberg News survey of 41 economists and brought to a close six straight quarters of contraction, the longest slump since the euro's debut in 1999.

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Germany and France, the euro area's two largest economies, both showed faster-than-projected expansions in the quarter. While the overall outlook has improved, the recession pushed the unemployment rate to a record and parts of southern Europe remain mired in a slump, with more than half of young people in Spain and Greece out of work.

“We're not seeing a recovery, it's only a stabilization,” said Sylvain Broyer, Chief Eurozone Economist at Natixis in Frankfurt. “What we need is a pick-up in productive investment and I don't see that yet. You would need a good three to four quarters of positive growth in the euro area to expect the unemployment rate to edge down.”

In Germany, GDP increased 0.7 percent in the second quarter, more than the 0.6 percent gain forecast by economists. The French economy expanded 0.5 percent after two quarters of contraction. Still, at least four of the euro area's 17 member countries remain in recessions, including Italy and Spain.

“This slightly more positive data is welcome, but there is no room for any complacency whatsoever,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in a blog post. “A sustained recovery is now within reach, but only if we persevere on all fronts of our crisis response.”

The European Central Bank has cut interest rates to a record low and pledged to keep them there or lower for an “extended period” to bolster the economy. With the jobless rate at 12.1 percent, the highest since the euro's inception, ECB President Mario Draghi this month described progress as “tentative.”

The International Monetary Fund last month cut its global growth projections, while the U.S. Treasury Department's top international official, Lael Brainard, said Europe faces the risk of prolonged economic stagnation unless policymakers encourage domestic demand. Euro-area unemployment has held at a record since March and almost a quarter of young people across the bloc are without jobs. The ECB forecasts that the euro economy will shrink 0.6 percent this year.

“The growth rates we're currently seeing are still far too low, and we're seeing an increasing gap between financial and political hope on the one side and economic reality on the other,” Stephen King, U.K.-based chief global economist at HSBC Holdings PLC, told Bloomberg Television on Monday. “The problem is the gap between the growth that's being delivered and the growth that's required to make the fiscal numbers add up in the medium term.”

Elsewhere in the region today, Britain's unemployment rate remained at 7.8 percent in the latest quarter amid signs the labor market is improving. U.K. unemployment claims fell twice as much as predicted in July.

Bank of England Governor Mark Carney has made unemployment a focal point of monetary policy by pledging for the first time to refrain from raising interest rates until joblessness falls to 7 percent. The Monetary Policy Committee voted 8-1 to link the outlook for its benchmark interest rate to unemployment, according to the minutes of its Aug. 1 meeting.

While Europe's recovery inches forward, conditions in major export markets such as the U.S. and China are improving.

In China, July industrial output rose more than economists expected after a larger-than-forecast rebound in exports eased concern that a credit squeeze in the world's second-biggest economy would curb growth sharply. Elsewhere in Asia today, India's wholesale price index rose a faster-than-forecast 5.79 percent in July and retail sales in New Zealand advanced 1.7 percent in the second quarter from three months earlier.

The U.S. economy, the world's largest, grew at a 1.7 percent annualized rate from April through June after a 1.1 percent pace in the first quarter.

“Euro-area export growth should benefit from a gradual recovery in global demand, while domestic demand should be supported by the accommodative monetary-policy stance as well as recent gains in real income owing to generally lower inflation,” Draghi said Aug. 1. The ECB cut its benchmark interest rate to a record low of 0.5 percent in May and committed in July to keep it at the present level or lower for “an extended period” to foster growth.

Global companies' second-quarter earnings suggest the worst may be over for Europe. The continent's second-biggest automaker, PSA Peugeot Citroen, reported a smaller operating loss for the second quarter than analysts had projected, and French car sales rose in July for the first time in almost two years. Henkel AG, the German maker of Loctite glue, reported second-quarter earnings that beat estimates.

From a year earlier, the euro-area economy shrank 0.7 percent in the second quarter, according to today's report, which is a first estimate for the April-June period. The statistics office is scheduled to publish a breakdown of second-quarter GDP next month.